Consolidation Sweeps Across Auto Dealerships During Pandemic

The CEO of Morrie’s Auto Group wants to double the number of dealerships that Morrie’s owns in the Twin Cities—expanding from 12 to 24.

“We have a lot of room for growth,” CEO Lance Iserman said in a Twin Cities Business interview. “We could add another 12 stores, and I would be comfortable with that.”

Iserman is an active player in the auto-dealer consolidation trend that accelerated during the pandemic. In February, Morrie’s acquired six dealerships in four western Wisconsin towns, although the Brenengen family that sold to Morrie’s retains a minority stake.

Following the recent transaction, Morrie’s owns 21 dealerships in Minnesota and Wisconsin and sells 23 brands of vehicles ranging from luxury cars Aston Martin and Bentley to American stalwarts Ford and Chevrolet.

New-vehicle sales in the United States declined 15 percent to 14.5 million in 2020, but the National Automobile Dealers Association (NADA) projects sales to bounce back to 15.5 million this year. The arrival of spring, federal stimulus checks, and vaccines are expected to propel vehicle sales in the coming months.

Record-selling dealer acquisitions
While vehicle purchases by consumers dropped during the peak of Covid-19, sales of auto dealerships were brisk during the pandemic year of 2020.

A total of 289 dealership transactions occurred last year—a 24 percent increase over 2019—and 47 more transactions than in the previous record year of 2015. That’s according to a report by Kerrigan Advisors, a national sell-side advisor to dealerships.

“This record-breaking market was driven by a resurgence in dealership profitability,” Erin Kerrigan, founder and managing director of Nevada-based Kerrigan Advisors, said in a March 22 news release. “This happened even with a dip in revenue, thanks to improvements in new and used vehicle gross profits and floorplan and SG&A (selling, general and administrative) expense reductions.”

Multiple factors are responsible for why so many dealerships are changing hands.

“Owners of large dealership groups are choosing to sell their businesses at today’s high valuations rather than accommodate the changes and investments required in terms of electric vehicles and digital retail sales,” the Kerrigan Advisors statement said. “This resilient—and resurgent—auto retail performance of 2020 has increased demand for dealerships and has continued to fuel valuations.”

Erik Gordon, a professor at the University of Michigan Ross School of Business, said Michigan’s auto manufacturers support dealer consolidation because they want dealers to be solidly profitable and able to meet their standards.

“They are substantial businesses, and they require a lot of cash,” Gordon told TCB. “The capital requirements are much higher than they were 30 years ago, and the service equipment is much more sophisticated.”

Dealers not only operate service departments with expensive, computerized diagnostic equipment, but with the advent of electric cars they will need to have dual systems to service electric- and gas-powered vehicles, he said.

Gordon emphasized it’s much more difficult today to own a single car dealership and run it as a mom-and-pop operation. “These dealerships are such big businesses,” he said. “They are dealer groups. Instead of the local bank saying, ‘We’ll lend you some money,’ it’s too big now to finance that way.”

In recent years, auto dealer groups also have relied more heavily on high volume sales. That’s because the profit margin on a given car or truck sale is relatively small. “As margins on the sale of a new car have fallen since the Great Recession, dealers have done an excellent job focusing on their service and parts business,” according to Patrick Manzi, NADA’s chief economist, in a report analyzing 2019 sales. “Since 2010, service and parts sales in the average dealership have increased by 5.4 percent per year on an average annualized basis.”

Dealerships as investments
Ownership of auto dealerships is becoming more concentrated, but who owns these companies also is changing. In the Twin Cities, Morrie’s Auto Group illustrates the trend.

Founder Morrie Wagener closed a transaction in 2016 to sell his Twin Cities-area dealerships to an investment business unit of the Bechtel family, which Forbes ranked in 2020 as the 45th wealthiest in the nation. Bechtel is known for its engineering and construction businesses.

Fremont Private Holdings, an investment arm of the Bechtel family, is the majority owner of Morrie’s, while CEO Iserman has a minority stake.

Crain’s Detroit Business published an article in February with the headline “Auto dealers leaving the family business behind in industry consolidation.” A mergers and acquisitions attorney, who was quoted in the article, characterized the ownership shakeup underway in the United States as “capitalist Darwinism,” with tough financial odds facing independent dealers who own one to three stores or dealer locations.

The transactions being made don’t simply involve a big business picking up a handful of small dealerships. Crain’s also reported on a recent deal between two large players in Michigan. Serra Automotive, the 22nd largest dealer group in the nation, acquired Buff Whelan Chevrolet, the highest-volume Chevrolet store in the United States in 2020.

“Changing technology, succession planning, and an intense competitive market are driving smaller automotive dealer groups to exit the industry as growing mega-dealers sweep the nation, consuming family names and businesses,” Crain’s reported.

Iserman, who joined Morrie’s after a long tenure with huge auto retailer AutoNation, said, “There is a big cost associated with a brick-and-mortar store.” In addition to ongoing operating costs of dealerships, “manufacturers are asking us to do more and more,” he said.

“You have to have scale to compete within those complexities,” Iserman said. He defined some of those complexities as needing expertise on new and used vehicle pricing, finance, insurance, information technology and human resources.

Morrie’s currently employs about 1,150 people.

“When you get scale, it helps to pay for the individual subject matter experts, and it gives us a competitive advantage,” Iserman said.

As he looks to add dealerships to Morrie’s portfolio, Iserman said it would be natural to increase Morrie’s presence in its existing Minnesota and Wisconsin markets. However, he said, Morrie’s could do acquisitions in a broader region in the Upper Midwest. When assessing potential acquisitions, Iserman said, “We look at geography and we want diversity in brands.”

Industry forced to change
Paul Walser, partner of Twin Cities-based Walser Automotive Group, is the current NADA chairman. Walser, Luther Automotive, and Morrie’s are large players in the Twin Cities auto sales market.

Walser, who started his career in 1974 selling Fords, urged dealers in the United States to reassess how they do business. “Customers don’t want to spend four hours understanding the price of a car,” Walser said in a March column to NADA dealers. “We must improve our operations so that customers are drawn to our speed, transparency, and control in the process. Shortening the transaction time is critical to our future.”

Walser also has been growing through acquisitions. Of particular note was a 2016 transaction, when Walser Automotive bought seven dealerships in Wichita, Kansas that sell luxury vehicles. At the time, Automotive News quoted Walser as valuing the transaction at “north of $100 million.”

While ownership of auto dealerships is becoming more concentrated, customers are falling into different segments based on how they want to interact with dealerships.

In a September report, McKinsey & Co., said, “The traditional automotive retail model is under severe pressure.” There is considerable fragmentation among consumers in what they want dealers to provide online and in person.

“Despite the ongoing importance of the dealership within the car-buying journey, our research shows that around 30 percent of customers today no longer use the dealer or do not see its clear value add,” McKinsey wrote. “Moreover, most respondents would switch dealers for more convenience or a better price, and around 40 percent say they don’t need to see their dealer face to face for repairs—they would be happy to have their car picked up and dropped off. These findings clearly indicate that the role of the dealership needs to change.”

Iserman said the variability in consumer preferences means Morrie’s dealerships have to have strong digital tools, but also provide the in-person communication that some customers still want.

Those who buy vehicles from Morrie’s fall into three categories.

“About a little over 40 percent of our customers come to us through the internet,” Iserman said. “Another 35 percent of customers call and ask questions about vehicles and then come in and buy a car.” The remaining one-fourth are customers who simply walk into a dealership.

Regardless of how customers connect with Morrie’s, the dealerships take a no-haggle, best-price approach. In its study, McKinsey found that “40 percent of respondents are strongly in favor of haggle-free pricing, and the majority would like to see the same prices online and offline.”